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AOL-Microsoft case no surprise
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January 23, 2002: 3:22 p.m. ET
Suit not expected to inflict much damage to software maker's bottom line.
By Staff Writer Richard Richtmyer
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NEW YORK (CNN/Money) - AOL Time Warner's civil lawsuit against Microsoft left open the question of financial damages the company is seeking, but industry observers were not surprised by the latest development in the ongoing antitrust epic.
Some expect that this latest suit is just the first of what could be many follow-on suits in the wake of the U.S. Justice Department's federal antitrust case against the software maker. But so far, none see it as having the potential to take a big bite out of Microsoft's bottom line.
"Civil litigation has always been the biggest risk of the Justice Department's case against Microsoft, and I always thought AOL would sue," Laura Lederman, a software analyst at William Blair & Co., told CNN/Money.
"I knew this was coming, I just thought it would take a little bit longer," Lederman said.
Late Tuesday, AOL (AOL: up $0.31 to $28.71, Research, Estimates), the parent company of CNN/Money, filed a civil lawsuit against Microsoft (MSFT: down $0.90 to $63.56, Research, Estimates), citing the same grounds that were used in the Justice Department's antitrust suit against the company.
In its complaint, AOL argues that Microsoft's actions in promoting its own Internet Explorer, or IE, Web browser, had "inflicted considerable harm" and the company acted illegally to hinder the adoption of Netscape Navigator, which AOL acquired when it bought Netscape Communications in November 1998.
In June, a U.S. appeals court upheld findings in the U.S. Justice Department's case against Microsoft that the company illegally used its monopoly in personal computer operating systems to maintain its dominance.
However, it overturned an order to break the company in two, ordering a lower court judge to come up with an alternative remedy for the anticompetitive practices and reconsider some other issues, including whether Microsoft had acted illegally by bundling its IE Web browser to its Windows operating system software.
The Justice Department and nine of 18 states that filed the antitrust suit against Microsoft reached a tentative settlement agreement with Microsoft last November. Nine other state attorneys general continue to push for more severe restrictions on the company, and the judge hearing the case has yet to rule on the various proposals.
In a statement, AOL General Counsel Randall J. Boe called the lawsuit "a logical extension" of the Justice Department's case, from which many of its arguments are drawn.
The complaint is not specific about the amount of damages sought, saying it wants to "receive treble damages compensations for the harms inflicted" by Microsoft. That would mean calculating the amount of money Netscape lost due to Microsoft's alleged illegal conduct and multiplying it by three.
But determining a dollar amount could prove quite difficult, since neither company charges for its Web browser software. Some have suggested that the amount could be as much as $16 billion. Others say it would be much less.
"Over the long term there certainly will be some money changing hands," Rob Martin, digital media analyst at Friedman, Billings, Ramsey, told CNNfn's The Money Gang Wednesday.
"There's definitely a payment out there, and AOL eventually will take a check from Microsoft," Martin added. "It's been in the wings for some time, being used as negotiation leverage. Now that those negotiations are effectively over, AOL can go forward with its suit."
Melissa Eisenstat, an analyst at CIBC World Markets, could not say what the financial impact on Microsoft might be. But she did say she was not surprised by the suit, and she expects to see similar suits in the future.
"Everyone's going to go after Microsoft - Apple, AOL, Sun. They're all going about it in their own ways," Eisenstat said. "We're going to get a lot of this kind of stuff."
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"Everyone's going to go after Microsoft - Apple, AOL, Sun. They're all going about it in their own ways."
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Melissa Eisenstat
CIBC World Markets |
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To be sure, Microsoft's legal staff will be keeping busy for several years to come. Already, it is juggling several high-profile cases.
In addition to the Justice Department case - which effectively has become two cases, with the judge considering the holdout states' settlement proposal separately - Microsoft is trying to conclude a price-fixing class-action suit filed by more than 100 plaintiffs who charged the company used its market dominance to charge unfair prices for its Windows operating system software.
A proposed settlement in that case was rejected by a federal judge in Baltimore earlier this month.
Even so, Microsoft's strong balance sheet and its ability to generate massive amounts of cash puts it in a strong position to absorb even quite large financial hits as a result of current or future lawsuits, said Ken Kiarash, and analyst at Buckingham Research Group.
CNN/Money's special report: Microsoft on trial
"The financial impact to Microsoft would be minimal," Kiarash said.
Microsoft currently is sitting on more than $38 billion in cash and is generating more than $2 billion in cash per quarter. And by Kiarash's count, the company will have roughly $50 billion in cash by the end of this year.
"So if this case, and even many cases like this that are either in court or would potentially be filed in the next several quarters, actually do succeed and Microsoft ends up paying a few billion in damages ... it will have a minimal impact on the company's bottom line," Kiarash said.
Furthermore, even if there were a financial settlement, Kiarash said the cases will take years to wind their way through the legal system, giving Microsoft even more time to set aside the cash to be able to cover any of them that do not go its way.
"I'm not concerned about their cash position, financial health or the impact it would have on their bottom line," Kiarash said. "And it certainly won't have any impact on their top line." 
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